A tougher business environment

THIS time of the year is when the Treasury begins its consultation process, collating feedback to prepare the annual budget to be tabled in October, for the following year. Over the next few months, industry representatives will submit their views and recommendations to the Ministry of Finance and then wait till the parliamentary announcement by the prime minister.

Those who have made these submissions over the years will often wonder whether these proposals are taken seriously or not, as there is no mechanism by which the government provides a response on whether they would be included. While it is true that there are consultations by the government, it often feels like these are done for perfunctory reasons and that the ministry already has its new policies ready to be implemented regardless of the feedback.

This year, those drafting budget policies ought to take a closer look at the business environment.

In the World Bank Doing Business Report 2017, Malaysia's rank fell by one notch to 23rd place out of 190 economies. This was due primarily to two indicators, namely "Starting a Business" and "Paying Taxes". Last year when the report was newly launched, Pemudah (a taskforce to facilitate business) announced that it was setting up a focus group on paying taxes to identify and adopt best practices to improve Malaysia's performance in this specific area, where we rank 61st, much lower than our overall rank. Perhaps this group may want to expand its scope and look at other areas of taxation policy, especially as this seems to be creating new challenges for businesses.

An English daily reported that more manufacturers are moving out of the country citing the different operating environment, chief of which was the rising cost of doing business due to the implementation of government policies and a lack of regulation on certain fees. This is a worrying trend, especially if other multinationals begin to feel the pinch as well.

An Ideas policy paper gave an example of how governments that tax too highly tend to lose out because eventually consumers switch to illegal products and this results in a loss of revenue. A good example is the cigarette market in Malaysia where one out of every two packs smoked today is illegal, which has in turn put pressure on the legitimate businesses.

When this occurs, the government would not be able to achieve its policy objectives on two counts: first, it does not satisfy its health objective (since people turn to the unregulated, illicit and cheaper cigarette) and second, it does not even fulfil the fiscal objective (since revenue collection falls instead of increasing). But this can apply to other sectors too if they were to be so highly taxed that it reaches the revenue maximising point in what is called the Laffer Curve. This is the point at which government is able to collect the modest amount of money necessary to fund its legitimate functions.

But governments have a role to play in managing the country's finances. However, the challenge always lies in finding the right balance; that sweet spot that allows an ideal ratio, to opt between collecting higher revenues to provide better public infrastructure versus not chasing away businesses and potential investors. Even the classic "Sim City" online game's planning guide suggests an ideal tax rate that will "not make Sims happy or sad, but will generate the most revenue with the least impact".

More specifically, taxing a company highly essentially punishes it for the investment and production that it undertakes. In the paper, economist Dan Mitchell states that "high tax rates on multinational companies … are ill-advised since such firms have considerable discretion over where to conduct their operations". He argues that a country with "a burdensome tax regime is less likely to enjoy strong economic performance", and cites the economic stagnation in many European countries as grim evidence that "excessive taxation imposes a very heavy cost".

As the Treasury prepares the national budget, it is hoped that policymakers take cognisance of the potential impact of its proposed tax rates and other rules imposed on businesses. If the multinationals are not able to cope, one wonders how the small and medium enterprises are managing. What is the business environment like for any business owner? Have government rules served to ease and smoothen operations to promote growth and competitiveness, or have they become more stifling?

If the latter is true – and a larger, more extensive survey of businesses would be needed to qualify this – then it is time for a review of the rules that hamper businesses from flourishing. It is not merely about the survival of businesses in Malaysia. Essentially, it is about freeing the enterprising, entrepreneurial spirit that lies at the heart of our economy. It is about promoting investment, innovation and creativity, not punishing these traits – above and beyond grand motherhood statements spouted by politicians.

If the Malaysian business spirit falters as a result of relentless bureaucratic rules, and with it the economy, this will come to the detriment of our collective future and that of future generations. For the next budget cycle, one hopes that wisdom prevails.